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Macro Voices

MacroVoices #380 Jim Bianco: FOMC to China to Dollar to AI

Thu Jun 15 2023

MacroVoices Podcast Summary

Episode 380 - June 15th, 2023

  • MacroVoices is a free weekly financial podcast targeting professional finance, high net worth individuals, family offices, and other sophisticated investors.
  • The podcast features interviews with the brightest minds in the world of finance and macroeconomics.
  • This episode was made possible by Respect Energy, a leading European trader of renewable energy and a one-stop shop for all green energy investors.
  • Bianco Research founder Jim Bianco returns as this week's Feature Interview Guest to discuss the FOMC statement, the Fed's hawkish pause, where rates and stock prices are headed, and much more.
  • Patrick Soresna provides the macro scoreboard week over week as of the close of Wednesday, June 14th, 2023.
  • The S&P 500 was up 337 basis points closing at 4,418.
  • Other market indicators are discussed including US dollar index, August WTI crude oil contract, gold, copper, and uranium prices.
  • The Bank of Japan press conference and University of Michigan consumer sentiment are key news to watch this week.
  • Next week will have the Bank of England monetary policy and global

Federal Reserve and Market Analysis

  • The Fed did not raise rates for the first time in 14-15 months, leading to questions of whether it's a skip or a pause.
  • The dot chart shows that they think there will be two more rate hikes this year, totaling 50 basis points.
  • Of the 18 members who filled out a dot, 16 had the funds rate going up at least once.
  • Other central banks have done the skip or minor pause thing already this year.
  • The market perceives this as a dovish pivot coming soon, but the Fed has not said anything about cutting rates.
  • A dovish pivot is when the Fed takes a victory lap and backs off rates after hitting restrictive levels, which hasn't happened since 1995.
  • History suggests that the Fed only cuts rates when everything is going wrong and they're panicking.
  • The bond market is seeing higher rates while there are mixed answers from other markets.
  • The bond market is indicating higher interest rates, which could mean more inflation and rate hikes.
  • The stock market is experiencing a highly concentrated rally led by 8-10 big tech stocks, with Apple and Nvidia alone accounting for half of the gains in the S&P 500 this year.
  • The other 492 stocks are collectively unchanged on the year, suggesting not much is going on in the stock market.
  • Cap-weighted indexes show that the S&P is up because of a handful of stocks, but this may not be indicative of what the economy is doing.
  • There is a difference between what the bond market and stock market are saying about the state of the economy.
  • A dovish pivot from the Fed may only happen after a significant stock market crash, so it may not be wise to buy stocks now in anticipation of such a pivot.
  • The Fed has historically hiked rates until something breaks before pivoting to a dovish stance.
  • There is uncertainty about whether or not we have already experienced a breakage in the economy that would prompt a dovish pivot from the Fed.

US Dollar as Global Reserve Currency

  • The dollar index reached a high of $116, and there is speculation about whether it will remain at this level.
  • There is interest in the concept of de-dollarization and replacing the US dollar as the global reserve currency.
  • Historians and economists generally agree that the US has benefited from being the global reserve currency, but Jared Bernstein disagrees and believes it is a burden.
  • Jared Bernstein has been confirmed as the chair of the Council of Economic Advisers, which advises the US president on policy.
  • Being the global reserve currency allows for lower costs due to everything being priced in dollars, which benefits Americans but can be a burden for others who have to convert currencies.
  • There are no better alternatives to the US dollar as a global reserve currency because they are all more expensive.
  • There are no viable alternatives to the US dollar as a global reserve currency due to its depth and liquidity in the world payment system.
  • A digital currency could potentially replace the US dollar, but achieving depth of liquidity would still be a challenge.
  • China and Russia are working on a sovereign digital currency to compete with and eventually replace the US dollar.
  • The lack of rule of law in these countries may pose a challenge for their digital currencies to gain trust from other nations.
  • Developing countries may consider digital currencies as a sovereign currency to avoid being punished by the US, with Saudi Arabia and OPEC being potential candidates.
  • Maintaining dominance is important in currency markets, and there may be an alternative to the US dollar in the future.

Market Analysis and Geopolitical Events

  • The S&P looks like it's on the verge of breaking out, but broad confirmation of a market-wide move higher is not seen outside of big tech companies.
  • Mega-cap tech companies could keep going higher, but there's a limited window to get out when they go over the side.
  • Property stocks and office rates have been getting crushed while regional banks have rallied.
  • Financials being under pressure make it difficult to get an uptrend in the market.
  • The broad market went nowhere from March to May due to financials imploding on themselves.
  • China's reopening has been disappointing economically despite subway traffic returning to pre-COVID levels.
  • Economic growth in China hasn't picked up despite the reopening, causing worry about the property market and banking system.
  • The US, China, and Russia may be headed towards a new Cold War or even World War III due to recent geopolitical events.
  • This outlook affects the relationship between the US and China over the next 20 years and may be holding back foreign flows into China's economy.
  • Despite Chinese citizens being allowed to re-enter the economy after COVID lockdowns, economic growth has not taken off as expected.
  • An escalating conflict with Taiwan could have devastating consequences for global trade, particularly in semiconductors which are produced by Taiwan Semi.
  • The world is considering building fabrication plants in the US to alleviate their need for chips from Taiwan, but it will take a long time to build them.
  • China considers Taiwan as its 20th province and may not view taking control of it as aggression on a foreign nation.

Federal Reserve Operations and Market Predictions

  • The debt ceiling has been suspended until January 1st, 2025, allowing the Treasury to refill its checking account and borrow around $700 billion, which is a drain of liquidity from the financial system.
  • The Fed's reverse repo facility has $2.2 trillion that can be used to offset the liquidity drain caused by borrowing from the Treasury.
  • The Fed's reverse repo facility has $2.2 trillion with 115 counter-parties, mostly money market funds.
  • Money market funds give the Fed an overnight loan and get paid 5.05%.
  • About 45% of all the money and money market funds is at the Fed in this $2.2 trillion.
  • Money from the reverse repo facility is outside of the financial system, so refilling TGA won't affect liquidity if it comes from there.
  • If refilling TGA doesn't come from RRP, it will have to come from the banking system which could present a problem as seen in past examples.
  • In June 2022, Treasury issued $296 billion of securities that will settle on June 15th and we'll find out who bought them and what they used to pay for it.
  • If there's a big drop in RRP, it means it's already money outside the financial system going to another count, no big deal.
  • The RRP pool of money outside finance has increased from a couple of billion dollars to a couple of trillion dollars, which could cause trouble in the repo market.
  • In August 2019, six weeks after a $300-$400 billion raise by the Treasury, there was a big drain of liquidity by refilling the TGA, which caused dysfunction in the bond market and stock market crash.
  • This time, there may be more leeway by the market before announcing whether or not they will have an RRP.

Market Predictions and Investment Strategies

  • Nvidia's stock and other companies associated with AI are through the roof despite not having anything locked in or intellectual property that's good forever.
  • The AI trend may be similar to the dot-com mania of the late 90s.
  • People are more willing to invest in technology ideas now than they were in the past.
  • The hype around AI is real and can be transformative over the next 20 years, but it won't happen overnight.
  • AI has the potential to rewrite business models, not just allow companies to lean out their workforce and increase profit margins.
  • We may be overhyping some AI stocks, as we did with internet stocks in 2000.
  • It took 11 years for Amazon stock to break even after its hype cycle in late '99, but it eventually lived up to its promise.

Bianco Research and Market Updates

  • Bianco Research provides daily, weekly, and monthly institutional research on macro-level topics.
  • Retail investors can follow Bianco Research on social media for themes discussed behind the paywall.
  • EIA inventory showed a build of 7.9 million barrels with Cushing, Oklahoma building 1.6 million barrels, gasoline building 2.1 million barrels, and distillates building 2.1 million barrels.
  • US production stayed unchanged at 12.4 million barrels but is expected to start growing again soon.
  • Tape action was down on the inventory release and FOMC statement.
  • OPEC's price cuts seem to have been forgotten as prices are back down to pre-OPEC levels with the market more focused on demand than supply.
  • Oil remains stuck in a distribution cycle and may experience a potential washout event down to retesting $65, $64 or even temporarily dropping down to $60.
  • The equity markets and S&P 500 have blasted through the 61.8% February trade, which means the market is either about to reverse or headed towards new all-time highs.
  • The current spot price for S&P 500 is $4360 with a call wall above at $4400 and a put wall below at $4000, which is also heavy support.
  • Key resistance right now for S&P 500 is above at $4400 and key support below is at 4300, 4250, 4200, and then the key level of 4000.
  • Next week could see a decline back down to test that 4300 level before resuming upside.
  • NASDAQ has key resistance right now at 372 just above and key support below at 335.
  • The speaker expects a pullback in tech names and predicts a test of the 335 level by July Op-X.
  • They suggest selling bear call spreads on the cues and SPX out of the money to hedge downside risk.
  • Selling premium is interesting, but there are very low levels of volatility, so it's important to be cautious when hedging.
  • The VIX is currently at 14, and expected moves daily are less than 1%. Participants are looking at hedging by buying puts, but selling bear call spreads may be a better strategy.
  • It's important to be cautious with the VIX as we tend to see pops from low levels that coincide with sharp movements to the downside.
  • The dollar index is still in consolidation until there is a daily close above 105 or below 100. A catalyst such as an economic downturn could potentially see a bull breakout.
  • Gold has been consolidating above its 100-day moving average and has taken it right through channel support at 1969 on the August contract.
  • The gold market may experience a deeper correction, possibly down to $1850, before resuming its upward trend.
  • The price action in gold is disappointing and rallies are failing.
  • Uranium is one of the few commodities that seem to be working well right now, with a bull breakout continuing and set to test 2022 highs near mid 60s.

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